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Refinancing vs. Recasting: Which One is Right For You?

Rachel Mendelson

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Reading Time: 4 Minutes

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Once you become a homeowner, you will make monthly mortgage payments. As you pay back your loan, you may have the option to lower your monthly mortgage payment. There are a few ways to potentially lower your monthly payment and interest rates, but it’s important that you choose the option that works best for your financial situation. The most common option is to refinance your loan.

WHAT IS MORTGAGE REFINANCING?

Refinancing is the process of financing your existing loan over again, but with new loan conditions. When you refinance your mortgage loan, you replace your loan with a new one. However, this doesn’t mean you get rid of your debt. Instead, you move it to a new loan, with new terms.

The main reason a homeowners would refinance their mortgage loan is to get a better interest rate and term. For example, you could refinance your adjustable-rate mortgage loan to a fixed-rate mortgage loan, or refinance to a lower interest rate when they fall.

To refinance, your lender will look at all the factors they considered when you got your first mortgage loan, like your credit history and credit score, your debt-to-income ratio (DTI), and funds you have available for a down payment.

A less common option that could potentially lower your monthly mortgage payment, which is more rarely advertised, is called mortgage recasting.

WHAT IS MORTGAGE RECASTING?

Mortgage recasting is when you pay down a large part of your loan balance, either through one large sum or through making regular, extra payments, and then change your existing mortgage loan. To recast your mortgage loan, your mortgage lender will re-calculate your monthly payment using your lower loan balance. This means that you will pay less every month, because the principal balance of your loan will be smaller.

Recasting your mortgage loan should be a fairly simple process. However, your lender will usually charge a fee for recasting your loan.

Unlike with refinancing, there are little borrower requirements for recasting. When you originally got your loan, your lender looked at a number of factors to determine what you qualified for. As we mentioned before, they’ll look at these same things if you refinance. However, it’s different when you recast your mortgage loan. A lender may require that you’ve paid a certain amount of your loan back before they’ll consider you for recasting. This is because when you request to recast, you already have the home loan — you’re simply asking for a re-calculation of the amortization schedule. Keep in mind that not all loan types allow for mortgage recasting, such as VA and FHA. Check with your lender to see if your loan type is eligible.

REFINANCING VS. RECASTING

So, which one is right for your financial situation?

PROS AND CONS OF REFINANCING

Refinancing could be a good option for you. Some pros of refinancing include:

Pro: Refinancing may get you a lower interest rate if rates have fallen significantly since you got your loan. Many homeowners refinance for this reason, which reduces their monthly mortgage payment.

Pro: If your household income has changed, refinancing may a good move. If your income has decreased, you may want consider a refinance to a longer loan term so that you can spread out what you owe over more time. If your income has increased, you may refinance to a shorter loan term and be able to pay off your mortgage loan faster.

Pro: You can choose your new loan options and terms when you refinance. Maybe you had an adjustable-rate mortgage loan and now want a fixed-rate mortgage loan. Maybe you want to tap into your equity to use for other debts and expenses.

There are also some cons associated with refinancing your mortgage loan:

Con: You may have to pay closing costs on your new loan, which include things like appraisal fees, origination fees, etc. Refinancing is like starting from the beginning of the home loan process.

Con: You may end up paying more in interest. But how? Let’s say you’ve already been paying your current 30-year loan for 15 years. In the beginning of your amortization schedule, your monthly payments mostly go toward paying off your interest, but as you get into your schedule, more of your payment goes toward your principal balance. By getting a new loan, it puts you back at the beginning, where your payment mostly goes toward your interest.

PROS AND CONS OF RECASTING

The obvious positive to recasting is that you can reduce your monthly payment, but here are some other pros:

Pro: Recasting your mortgage loan may be cheaper than refinancing. Remember, when you recast your loan, you’re just re-calculating your loan based off of a lower balance. So, you’re just reducing your monthly payment. There are no expensive closing costs associated with recasting like there are with refinancing.

Pro: You won’t have to undergo another credit check, or submit income or debt information like you did when you applied for your loan.

Cons of recasting include:

Con: You’re not paying off your loan any faster. When you recast, your lender recalculates your mortgage payment based on your lower balance, but this doesn’t change your loan options, a.k.a. the length of your loan term. If your loan has a 15-year amortization, you will still pay your mortgage over 15 years.

Con: Paying down your mortgage may not be the best use of a large amount of cash. For example, if you have credit card debt or student loans, it may be better use of your money to put it towards that.

If you’re looking for a lower monthly mortgage payment, refinancing or recasting could help you do that. Even once you have a home loan, the mortgage industry and loan process can still be confusing, especially if you’re looking to refinance or recast your loan. Talk through any questions or concerns you have with your mortgage lender. They can help you decide what’s right for your financial situation.

The views and statements expressed are deemed reliable as of the publish date indicated and may not be accurate or reliable at any future date. The views and statements provided are those of the author. Discussions regarding any financial information provided are not intended as individual recommendations and do not reflect the views or advice of Atlantic Bay Mortgage Group, L.L.C. The views expressed are subject to change at any time in response to changing circumstances in the market. Atlantic Bay Mortgage Group, L.L.C. disclaims any obligation to publicly update or revise any views expressed or information given. Loan programs may change at any time with or without notice. Information deemed reliable but not guaranteed. All loans subject to income verification, credit approval and property appraisal. Not a commitment to lend. Atlantic Bay Mortgage Group, L.L.C. NMLS #72043 (nmlsconsumeraccess.org) is an Equal Housing Lender. Located at 600 Lynnhaven Parkway Suite 203 Virginia Beach, VA 23452.Copyright 2019 Atlantic Bay Mortgage Group, L.L.C. All Rights Reserved